Skip to Content

Court Puts Damper on Efforts by Defendants to Hide Assets from Judgments

Stone columns

When JRG takes in any client, our job is to provide a complete picture of the road ahead, which includes the litigation itself and the subsequent process to collect on the judgment. Unfortunately, we sometimes come across “slam dunk” cases against defendants who have little to no apparent assets. If a defendant has no money or property, our clients could be throwing away money to get an essentially useless piece of paper from the court saying the defendant owes money. Other times, a defendant may be extremely wealthy, which presents its own unique challenges, including the systematic and covert hiding of assets to protect against the collection of a judgment.

The latter problem arose in a recent case decided in California’s Second District Court of Appeal. In that case, Nagel v. Westen, the defendants sold a $2.2 million dollar home to the plaintiffs but failed to disclose that the home had extensive water damage, effectively making it worthless. After a hearing, the arbitrator awarded the plaintiffs $4.5 million in damages for the loss of the home and the futile efforts to repair it, plus attorneys’ fees and costs. Having seen the writing on the wall that a significant judgment was coming, the defendants took great efforts to hide their assets and shield against the collection of the judgment. The defendants transferred the bulk of their assets out of California and applied them to an expensive home in Texas to take advantage of that state’s unlimited homestead exemption. They also masked additional assets in a variety of funds, annuities and investments in Nevada and Minnesota.

Learning of the defendants’ scheme to hide assets, the plaintiffs went on the attack and filed a lawsuit against the defendants under the Uniform Voidable Transactions Act (“UVTA”), which provides that any transfer made by a debtor (i.e., a defendant) is voidable as to a creditor (i.e., a plaintiff) if the debtor made the transfer or incurred the obligation with the intent to hinder, delay or defraud the creditor. The plaintiffs argued that the transfer of assets into an uncollectable homestead in Texas and other asset-shielding mechanisms should be voided so the plaintiffs could collect on their judgment. The defendants argued that the assets were not actually transferred to a third party, but merely changed into a different type of asset, so the transfers should not be voided.

The lower trial court agreed with the defendants and dismissed the plaintiffs’ case. However, the plaintiffs appealed, and the Court of Appeal reversed the order, dismissing the plaintiffs’ claims under the UVTA, citing the UVTA’s stated purpose: “To prevent debtors from placing, beyond reach of creditors, property that should be made available to satisfy a debt.” (Chen v. Berenjian (2019) 33 Cal.App.5th 811, 817.) The Court of Appeal found that the defendants’ manipulation of their assets to shield from collection constituted a “transfer,” which made it subject to the UVTA.

The important takeaway from this case is that, as we advise our clients, the fight does not necessarily end at the time of trial, and it is important to know what type of defendant you are up against. The good news is that the California legislature and courts have made it clear that moving assets out of the state and trying to hide them will not guarantee you are judgment-proof.

If you have found yourself in a similar situation that warrants legal counsel, JRG Attorneys at Law is here to help. Give us a call at (831) 228-5619 or contact us online to get the conversation started.